The exploration and production (E&P) industry is looking to nontraditional digital-technology partners, and unconventional producers are turning away from traditional oilfield service companies in favor of flexible, nimble regional companies, a new report on the oil and gas sector said.
The report, researched and published by the strategy firm Clareo and the Kellogg Innovation Network (KIN), urges companies to increase the pace of innovation and rethink business models—or struggle to succeed or survive.
‘Industry’s New Normal’
The paper, “The Oil & Gas Industry’s New Normal: Rethinking Innovation Priorities in the Age of Low Prices,” identifies five emerging trends that are disrupting the industry’s global environment.
- Market forces are fundamentally reshaping the industry.
- Companies are simplifying, moving away from the traditional high-cost, complex system.
- The primary operating system of the industry “ecosystem” is under threat.
- Players must speed up the idea-to-adoption process.
- Maximizing asset productivity is critical.
The implications are significant and widespread, the report holds. Lead authors Peter Bryant and Satish Rao note that unconventional production will most likely keep prices in the USD 45-to-60-per-bbl range for some time. The impact of this price cap is twofold: high-cost producers will struggle to thrive or survive, and it is imperative that they become profitable at USD 45 to 55 per bbl.
Additionally, digital solutions represent a major opportunity. E&P companies are looking at nontraditional players as new partners, challenging the industry’s status quo and the relevance of traditional digital players. Consequently, the business model is shifting to more of a mixed reliance on Silicon Valley-like companies and proprietary solutions developed by E&P companies.
Digitally Enabled Insights
“As in other industries, the oil and gas industry will see value shift from hardware, which is already getting commoditized, to insights that are enabled by this new digital technology and software,” said Rao, a partner at Clareo. “This is leading to a rush of new providers that are offering digital solutions.”
The authors also point out that unconventional producers are turning away from traditional service companies. The producers believe regional service companies are better aligned to their needs based on their business model, price, flexibility, knowledge, and speed.
Although traditional service companies thrive in a “big field” world, they don’t seem fast enough to respond to what is happening locally, the report argues. This “big field dominance” is now in jeopardy as unconventional spending and the reliance on the service companies continue to decline.
“The conventional sector has thrived on complexity and one-off solutions; it now has to move toward simplification and standardization to drive down costs and learn how to speed up the idea-to-adoption cycle,” said Bryant, a managing partner at Clareo and senior fellow at KIN.
“The lesson from other industries, from retail to power utilities,” he continued, “is that it is really hard for companies that are optimized for a certain world to pivot and reinvent themselves for a new world that, by its nature, invites new players. This represents an equal challenge to E&P companies focused upon large conventional projects and the traditional oil service companies.”
Risks and Opportunities
The report elaborates on the ripple effects of each trend, envisioning the risks and the opportunities for international oil companies (IOCs), national oil companies, and unconventional operators. It also summarizes the key business challenges in the upstream industry, the innovation priorities for each player, and the implications.
“Unconventional oil and gas operators are setting the pace for innovation, and influencing larger IOCs to apply learnings to conventional production,” Rao said. “Companies who are able to rapidly adopt ideas and scale them will create a competitive advantage. This scenario will create winners and losers based on [those] who are able to adopt and adapt innovative approaches, and [those] who struggle to do so.”
The findings were based on interviews with executives from more than 20 organizations involved in the global oil and gas industry and supplemented with secondary research.
The entire report is available at http://www.clareo.com.